Dave Ramsey on the Retirement Expense Nobody Budgets For (And Why It's Going to Get Worse)

Many retirees assume Medicare will cover their healthcare expenses, and worry more about housing, travel, and food expenses. However, health care is one of the least understood costs for seniors, and it's also the one that can completely derail a budget.

Financial expert Dave Ramsey has his own take on how to handle these often unexpected costs, and what they mean for a retirement plan on a fixed income. Consider his advice when planning how much you can live on in retirement.

Why health care is a retirement wild card

Even when the cost of a hamburger goes up, or fuel prices fluctuate, you can have some idea of what you'll spend on them in a given month (or even skip them completely, if needed). Health care doesn't always follow these trends. That's because there's more than market costs at play.

Your insurance coverage, the meds you need, and how your physician treats and diagnoses a condition can each cause your out-of-pocket expenses to skyrocket. Fidelity estimates these costs at over $345,000 for a couple over the course of their retirement.

Absorbing these costs isn't always possible, and you can't just adjust your dinner menu or travel plans to accommodate.

What Medicare doesn't cover

Seniors may also rely heavily on their Medicare plans to cover more of the expensive treatments they need. However, premiums generally increase each year and eat into a sizable share of Social Security's cost-of-living adjustment (COLA).

Also, Original Medicare doesn't cover dental, vision, or hearing services. Long-term care, another big expense, is rarely covered unless it follows a surgery or inpatient stay and is part of a short-term rehabilitation program.

By the time you add up premiums, co-pays, the Medicare "donut hole", and uncovered services, seniors may find themselves paying hundreds of dollars or more each month just to stay on course.

Why Ramsey says Medicare falls short

These medical costs can be big, and it's not that retirees think they won't pay for health care. They simply think Medicare pays for more than it does. But Dave Ramsey's team has said that if Medicare were an outfit, 'it'd be a bikini' — because it doesn't cover many of the things traditional insurance doesn't cover, such as hearing aids, podiatry, annual physicals, and chiropractic services.

That's why he often tells his listeners to know what their Medicare plan currently covers, what gap coverage offers, and how to review plans every year during open enrollment. This ensures that you have the best plan for your needs (whether that's traditional Medicare or Medicare Advantage) and can pay as little out of pocket as possible.

New Medicare changes could cost you

The AARP recently published a list of changes to the Medicare program that Ramsey and other experts have highlighted for their audiences. Key takeaways include:

• Out-of-pocket Part D cap rising, so retirees may pay more in total for their prescriptions
• Premium and deductible increases for Part B and Part D
• Plan changes and consolidations, especially for stand-alone Part D plans, making it risky to not compare plans before you buy

These changes, even with lower prices for some drugs, make it expensive for some seniors to automatically renew plans, even those they've had for years. Ramsey's advice to review choices during open enrollment stands. Shop around to ensure you aren't overpaying or getting reduced coverage for the services you truly need.

Medicare's trust fund problem (and what it means for you)

There's more trouble on the horizon for unprepared retirees, and it's the Medicare Hospital Insurance (Part A) trust fund. This is the portion of Medicare that's free for many seniors, and that pays for inpatient hospital stays and some related services. It's funded largely by payroll taxes.

However, there's a funding problem, with a shortfall predicted if nothing happens. Economists predict that the Medicare Hospital Insurance trust fund will be depleted in the 2030s, which could mean reduced payments unless policymakers act to close the gap. Even if benefits aren't cut outright, closing the gap could require higher payroll taxes, higher premiums, increased cost sharing, or some combination of these. All of these make healthcare more expensive for future retirees.

Ramsey's playbook for rising medical costs

Even with these rising costs, seniors have some options to stick to their plan. Ramsey is a proponent of tax-advantaged accounts, such as Health Savings Accounts (HSAs), when eligible, for building a dedicated health fund. These pre-tax dollars grow tax-free and then remain tax-free when used for qualified medical expenses.

It's a triple tax advantage that helps you put aside cash for what may be the most expensive part of your retirement.

How to budget for health care in retirement

If you've never created a budget for these kinds of unpredictable costs, start here:

Create a baseline budget using past expenses and a healthcare cost calculator to get a ballpark of your lifetime number. This is a starting point that gives you something to aim for.

Translate lifetime estimates into annual line items. If you expect to spend $250,000 over 20 years, divide that out. Refer to this baseline in your budget, but assume most costs will shift toward later years.

Separate out pre-65 and post-65 plans. If you are still working or have access to a spouse's healthcare plan, you may spend less on healthcare than with Medicare. Adjust your budget to reflect this.

Revisit these numbers annually, earmarking what may be premiums, deductibles, and out-of-pocket maximums for your particular plan.

Bottom line

Dave Ramsey is right that health care can be a "gotcha" in retirement, especially if you under-budget for your retirement goals. Recent projections suggest that numbers will only rise, so underprepared households may feel more pain than previously thought.

To prevent an expensive surprise, treat healthcare as its own line item in your retirement budget, not an afterthought. Aim for an annual number and use every tax-advantaged tool you can, along with comparison shopping, to pay as little as possible for the care you need without assuming Medicare will have it all handled.